Dairy Industry Finds Decades-Old Subsidies Are Not Sacred Cows

The first two months of the Reagan administration were bad ones for the once-formidable dairy lobby, and the next few are likely to be worse. More so far than any other industry, milk producers are seeing their subsidies cut.

Almost all interest groups depend somewhat on Washington for protection, but the dairy farmers go whole hog. Their entire livelihood depends on federal regulation and federal price supports; there is no free market in milk at all.

Since 1949, the federal government has been legally bound to buy whatever milk American dairy farmers produce that cannot be sold to the public. The price at which the government buys milk products is set as a percentage of "parity," a complex formula reflecting the buying power of agricultural commodoties in 1910-14, great years for American farmers. Until next Wednesday dairy farmers will receive 80 percent of the parity price for milk. Then, because of legislation approved this week by the House and Senate, the support will fall to 75 percent of parity.

Yesterday, Congress voted to kill a scheduled milk price support increase, giving President Reagan what he wanted in a congressional test of his budget proposals.By canceling the semiannual April 1 increase in the milk-support level, the bill would save $147 million in federal dairy purchases, and prevent milk prices from rising an estimated 8 cents a gallon.

Sometime this week dairy farmers are likely to get official confirmation of even worse news. In the new farm bill it will propose, the Reagan administration wants to cut the milk price support down to 70 percent of parity, lower than it has ever been. In fact, at the end of this week officials in the Office of Management and Budget were still hoping for a provision in the new bill that would allow the price support to fall to 65 percent of parity when government surpluses become too large.

Changes this substantial could radically alter the dairy industry, which has counted for many years on a guaranteed and reasonably high price for milk. In the coming months the dairy lobby will fight fiercely for a more congenial farm bill.

The support program has not made dairy farming more popular -- on the contrary, where there were a million dairy farms a dozen years ago, there are fewer than 200,000 today. The fact that dairy farmers have to "harvest" two highly perishable crops every day, 365 days a year, may have something to do with this decline, but so too does the fact that dairy farming is not a route to wealth for most.

Nevertheless, the current level of price supports is high enough to induce high production, and also to persuade many farmers who keep dairy cows and also raise other crops to concentrate on dairy in the last couple of years, when prices for other farm commodities have been relatively low.

Rep. Tom Harkin (D-Iowa), chairman of the diary subcommittee in the House and a loyal supporter of the industry, told his colleagues this week that holding the price support constant -- as Congress voted to do, rather than permitting the April 1 increase -- might actually spur more milk production in the short run. Harkin may well be right.

Farmers have huge investments in their dairying equipment, and if prices supported by the government fail to keep up with inflation, one natural reaction for them is to produce more milk if they can to maintain their gross income. This is a sensible option because the government is committed to buy all surplus production without exception.

There is no easy way to summarize the American dairy industry. It provides dairy products at cheaper prices than in any nation except Australia and New Zealand -- yet prices are not low, and some experts think consumption has been declining because they are too high. The dairy industry is not really booming, yet it is producing huge surpluses.

The three biggest milk cooperatives donated $1.2 million to House and Senate candidates just in 1980, and in recent years the dairy farmers' interests have been faithfully protected in Washington. Agriculture Secretary Bob Bergland tried in the Carter administration to cut back the price support, but he was overruled, reportedly by then-Vice President Mondale, from the milk state of Minnesota and long an ally of the dairy farmer.

This year the dairy lobby, led by Patrick B. Healy of the National Milk Producers Federation, has a number of gambits to preserve something for its members. For example, Healy wants to persuade the Commodity Credit Corp. to take two steps it is legally entitled to take to increase payments to farmers without any new legislative authority.

In its price support program, the CCC cannot buy perishable milk, but purchases powdered nonfat milk, cheese and butter instead. The support price is set for liquid milk, then a "make allowance" is added to it to give processors something for the cost of converting milk into those commodities.

The industry says the make allowance is too small, and that processors compensate for that by offering farmers less than the formal support price for their milk. By raising the allowance the CCC could raise milk support payments to farmers even if Congress freezes the official support level.

Similarly, the CCC allows processors to buy back commodities bought and stored by the government for 105 percent of the price the government paid for them originally. This is an inducement to some companies to use the government as a storage facility, the dairy lobby contends, thus artificially increasing the amount of "purchases" the CCC must make. The lobby wants a sellback price set at 110 percent of purchase price.

Whether the Agriculture Department -- under a watchful eye from David A. Stockman's OMB -- will do either of these is uncertain. Meanwhile, Stockman's free-market philosophy has given the dairy industry a new concern. The key element of the federal dairy program is not the price support system, but the national milk marketing arrangements that effectively fix prices for fluid milk region by region for most of the country.. Without these "milk marketing orders," milk production in many sections of the nation would wither, leaving more and more of the market to the most efficient regions like Wisconsin and upstate New York.

Dairy lobbyists noted glumly this week that Stockman has targeted a similar system of marketing orders for fruits and vegetables as a candidate for "regulatory reform." If the idea got around that the dairy industry, too, should be deregulated, dairy farmers and their representatives in Washington would be struggling for the survival of the only system they have ever known.